Essay on Business Decision Making

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Introduction
The corporate decision-making approach is a step-by-step procedure that allows experts to solve
issues by analyzing facts, considering options, and eventually deciding on a course of action. As
opined by (Kimmel et al., 2020), perhaps the most significant aspect of a manager's job is the
capacity to make decisions. It is the most crucial step in the planning process. When managers
plan, they consider a variety of factors, including the objectives that their organization will
pursue, the resources that will be used, and who should be in charge of what.

To show how management proceeds with the decision-making process, this essay is prepared
based on the data given by Akwaaba plc, a well-known textile manufacturer with operations in
the United Kingdom and portions of Europe. First, I have discussed the steps involved in making
a business decision. Secondly, I have calculated the Pay-Back period and NPV for Akwaaba plc
and interpreted them to facilitate the management in the decision-making process. Finally, the
essay ends up with a recommendation on choosing the best available option based on the
calculated result.
Steps in Business Decision-Making Process
Good decision-making is a skill that must be taught. It's a stage process procedure that we learn
from experience instead of inheriting. While there are several elements to consider while making
a choice, just five must be considered in order to make successful selections (Aydiner et al.,
2019). The following are the steps to follow:

1.
Determining what is wanted to be achieved

2.
Gathering all of the required information

3.
Considering all of the potential dangers and repercussions.

4.
Making a choice and carrying it through.

5.
Examining the decision taken

Figure: Steps involved in making a business decision

Source: (Garg & Rani, 2020)

Benefits of Making Appropriate Business Decisions

It's important to make the best judgments feasible given the conditions whenever possible.
According to (Mohamed, 2018), There are at least four major advantages to making decisions:

 Decisions that are well-thought-out have a longer shelf life.

 Both internal and external aspects are taken into account while making a wise decision.
 Conflicts of interest are avoided when smart decisions are made.
 Good decisions are more successful in the long run.

As part of the first step, Akwaaba plc is looking to invest in a project manufacturing bags or
shoes. So, the main goal in this decision-making process is to find out the best alternative from
the two given options to make an investment.
To make such a decision, Akwaaba plc has gathered some condensed information relating to two
different projects one of which is named project- A (Bags) and the other is named project- B
(shoes). Net cash flows for the above two projects have been determined by the management’s
best estimation along with other financial models.

Financial and non-financial factors

Every decision is surrounded by risk and uncertainty and management should carefully consider
those risk issues and determine an appropriate discount rate to counter and justify taking those
risks (Kimmel et al., 2020). Here, I have just evaluated the projects with only two simple
financial models. Many more renowned financial models are available to assess the
attractiveness of an investment project. Again, the future is always uncertain. It can’t be
measured with full of certainty. So, managers should be careful and prepared to tackle any threat
that might arise in the future. The management of Akwaaba plc has determined the required
discount rate for both projects is 14%. Using the rate, we can calculate the followings.

Pay Back Period Method

The payback period is the amount of time it takes for an owner to return his investment
expenditures or break even. Extended payment durations are disliked, whereas shorter repayment
periods are favored. When liquidity is a crucial consideration in project selection, the payback
time is often employed. As stated by (Gorshkov et al., 2018), the simplicity of the payback
period method is one of its main benefits. It is not necessary to do more complex calculations
that take into account other elements such as discount rates and the influence on throughput.

Divide the initial investment by the yearly cash flow until the cumulative cash flow is positive, at
which time the payback year is found. In most cases, the payback term is specified in years
(Silva et al., 2019). To get the payback period of the given two projects considered by Akwaaba
plc, the following calculations need to be done.
 Year Project- A Project-B

Cash Flows Cumulative CF Cash Flows Cumulative CF

0 (£180,000) (£180,000) (£170,000) (£170,000)

1 48,000 (132,000) 45,000 (125,000)

2 62,000 (70,000) 65,000 (60,000)

3 85,000 15,000 82,000 22,000

4 100,000 115,000 98,000 120,000

5 110,000 225,000 110,000 230,000

From the above table, we can now calculate the payback period for every project. For project A,

7 0,000
PY= 2 years +
85,000
×12 months

= 2 years and 9.88 months or 10 months.

Similarly, for project B,

60,000
PY= 2+
82,000
×12 months

= 2 years and 8.78 or 9 months.

In terms of the payback period, the two projects are very close to each other. If these two projects
are independent, management may go for investment in both projects as their payback periods
are low enough indicating that from both projects invested amount will be recovered within the
first 3 years of their operations. However, if these two projects are mutually exclusive, Akwaaba
plc should go for Project - B as its payback period is lower than Project- A.

Net Present Value (NPV) Method

The difference between the current value of cash inflows and outflows over a period of time is
known as net present value (NPV). NPV may be used to examine the competitiveness of both
projects in capital budgeting and investment planning (Marchioni & Magni, 2018). NPV
calculation is demonstrated below.
 Year Project A Project B
CF Discounted @14% CF Discounted @ 14%
0 (£180,000) (£180,000) (£170,000) (£170,000)
1 48,000 42,105 45,000 39,474
2 62,000 47,707 65,000 50,015
3 85,000 57,373 82,000 55,348
4 100,000 59,208 98,000 58,024
5 110,000 57,130 110,000 57,130
NPV @ 14% £83,523 £89,991

From the above table, it is seen that the net present value of project B is higher than that of
project A which means that project B will add more to the wealth of Akwaaba plc than project A.
So, if the projects are mutually exclusive, then Akwaaba plc should go for investment in project
B. However, both projects’ NPVs are positive meaning both projects are economically viable to
invest in.

Recommendation and Conclusion

The ultimate success of a business is highly dependent on taking the right decision at the right
point in time. So, the importance of taking the right business decision is much more significant
from all stakeholders’ points of view. Throughout the calculation, project B claims the first
choice to make an investment by Akwaaba plc.
References
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Gorshkov, A. S., Vatin, N. I., Rymkevich, P. P., & Kydrevich, O. O. (2018). Payback period of
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Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2020). Financial accounting: tools for business
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Silva, G. S., Yeske, P., Morrison, R. B., & Linhares, D. C. (2019). Benefit-cost analysis to
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